9/22/2023 - Economy and Finance

Investing in markets responsibly: ASG factors and their growing importance

By Gustavo Neffa

Investing in markets responsibly: ASG factors and their growing importance

Over the past decades, population awareness of environmental care has been increasing exponentially. Governments have helped to increase regulations and regulate what seems more than obvious today, but a while ago it was unthinkable.This is how individuals have also experienced changes in habits in their daily life with the intention of protecting the environment and accompanying these advances, with some of the following behaviors:- Elimination of plastic bags in supermarkets- Products with more recycled components, both in packaging and in electronics.- Preference for electric cars, accompanied by tax exemptions.- Paper and non-plastic lamps in drinks or soft drinks- Waste separation, etc...But also social and environmental awareness has decreased to stay in the world of business and markets: the traditional measures to evaluate an investment in the stock exchange, such as profitability, risk and liquidity, were added selectively to the feasibility of the project according to the environmental year and the quality of life. It is mainly given in institutions or institutional investors more than individual.It was fashionable the management of factors Environments, Social and Governance (ASG), fundamental aspects to maintain the long-term value generation capacity of the entire company: more and more institutional investors are fixed in these practices by investing.

  • The factors ENVIRONMENTAL consider how an organization is played as a nature administrator. The "A" factor refers to the performance of a government, a financial institution or a company in relation to climate change, biodiversity administration and natural resources and waste management.
  • The factors _ They refer to the organisation's relationship with its different interest groups (employees, customers or suppliers, communities, citizens, etc.) It encompasses human rights, labour rights and working conditions, health and safety at work, equal opportunities, the rights of original peoples and, more widely, human rights.
  • The factors of GOBERNANZA They refer, among others, to the assignment of functions, responsibilities and rights between the different parties concerned in the governance of a financial institution or a company, or in the political governance structures of a country. The "G" factors involve issues such as transparency, balance and information.
There are sustainable projects and ventures from the investor's perspective, which will evaluate the application of funds, either as shareholders or as creditors. Environmental factors condition funding possibilities.Increasingly environmental factors condition funding possibilities. But there are also more people concerned about the environment and pollution and funds that will want to cover this demand by selecting the assets that have best ASG practices. The BlackRock fund manager projects that over the next decade sustainable ETFs will increase from $25,000 million today to $400 billion.The income of an investment is determined by estimating the current value of a future fund flow discounted to the capital cost calculated based on the own risk of investment. Worse, what interest could an investor have in supporting this type of ventures if the profitability of the project is lower because it has to take into account certain environmental aspects that increase the cost of the project? We have already entered the ethical field in which investor interests and concerns come into play, in addition to mandatory regulation for certain investors.Banco Galiza has the ASG Sustainable Fine Fund, which is a fund composed of local assets with outstanding ASG aspects: they are asset emissions from companies that have good ASG practices, as negotiable obligations that some energy companies have issued to finance “green” projects, i.e. the development of clean technologies and energies.In Argentina, the National Values Commission (CNV) defines the Investment Socially responsible As the one who, in addition to assessing the strictly financial risk and traditional criteria of finance, also takes into account ASG criteria.The investment in ASG may also be omission: the investment of exclusions is a strategy that focuses on excluding from the portfolio the investments in sectors or companies of the known as “Sins Stock” (sin actions) that invest in businesses of so-called non-ethical or immoral such as weapons, tobacco, alcohol, casinos, as well as environmental damage.Social, Green and Sustainability Bonos (SVS): In General Resolution 881 of 2021, the National Values Commission provided three guides to give a framework to sustainable investments.Social Bonos: Affordable basic infrastructure, access to essential services, affordable housing, job generation and may include funding from Pymes and microfinance.Green Bonos: Any type of instrument through which the funds are intended solely to finance or refinance, partial or totally, Green Projects as renewable energy generation, energy efficiency demand, pollution prevention and control, environmentally sustainable management of the life of natural resources and land use, land and aquatic biodiversity conservation, clean transport, sustainable water and wastewater management, adaptation to climate change, ecological products and buildings.Sustainable companies are those that seek success in various aspects such as: well-being of their employees, quality of their products or services, origin of their inputs, environmental impact, social, political and economic impact of their social and economic activity and development of their country.Sub-Sovereign Green Bonos: pioneers in the emission of green obligations in Argentina were the provinces of Jujuy and La Rioja that issued the first green obligations at the local level, which were placed in international markets in 2017.
  • The province of Rioja obtained $200 M, of which 170 M was intended to finance the expansion of the wind facilities of the Arauco Park, and the remaining 30 M to friendly public works projects with the environment. For this, titles were placed with an eight-year period.
  • The province of Jujuy placed a bonus for $210 million within five years to complete the financing of the Puna Solar Park.
Ecuador announced the issue of 3 debt obligations to help preserve the Galapagos Islands (supported the Inter-American Development Bank and the Credit Suisse Bank).Bonos Related to Sustainability (VS): linked to specific targets of the issuer, but with the commitment to seek improvements in sustainability within the period laid down in the emission conditions of the title. These goals are measured through key performance indicators (KPI) and evaluated according to sustainability performance goals. In 2022, the company Red Surcos, an Argentine capital company that develops produces and markets inputs for the agricultural sector as herbicides, insecticides and fungicides, issued a bonus for growth in sales of herbicides Nano that reduce the environmental impact coefficient in relation to traditional herbicides. The rate increases if you do not achieve growth goals in the amount of liters sold.Sweden has received the most sustainable country title in the world for the use of renewable energy sources and their low carbon dioxide emissions. Morningstar uses as a methodology to select companies listed with ESG the methodology of exclusions from weapons-producing companies, tobacco, military contractors and thermal carbon. Sustainalytics issue ESG risk notes on a scale from 0 to 100. Sustainalytics Country Risk Ratings awards the least polluting countries: Norway, Switzerland, Luxembourg, Sweden, Australia, Iceland, Denmark, Canada, Finland and Austria.Corporate Knights analyzed 6,720 companies to carry out the Global Index of the 100 most sustainable companies of 2023: Iberdrola, Xerox, HP, Storebrand, Commerzbank and Intesa Sanpaolo lead the ranking of the most sustainable in the world.As for ethical and sustainable ETFs, they are not directed only to green technologies, but their criterion of selecting the asset basket seeks companies with positive goals on the environment, society and corporate government, always with the long-term focus. These ETFs seek companies that more resources and efforts (tangible or intangible) in p.iShares KLD Select Social Index Fund (KLD): more than three quarters of its components are large-scale Capitalization companies. Its reference index is the MSCI USA Index which has 250 companies.iShares KLD 400 Social Index Fund (DSI): more than 75% of its components are high-capitalization companies, but with the difference that has a small percentage dedicated to small capitalization that most do not have. Its reference index is the MSCI USA IMI ESG Index.North America Sustainability Index ETF (NASI): Its reference index follows a sector-neutral strategy with passive administration. Although 88% of its canast are US companies, it also dedicates 9.65% to Canada. Technology is the industry with the highest weighting followed by Financial Services.Pax MSCI EAFE ESG Index ETF (EAPS): this ETF is diversified by regions centered in Europe and Asia. Its highest concentration per sector is in Financial Services.iShares Dow Jones Europe Sustainability Screened (IESE): this ETF quoted in pounds and its main selection criterion is to exclude companies related to alcohol, tobacco, betting, weapons and entertainment for adults as much as possible. Its reference rate is almost 20% of the 600 largest European companies. Other selection criteria are good economic, environmental and social performance in Largo Term.

In summary, concerns about the environment and sustainable conduct are getting little more adherents every day and this is reflected in the instruments available on the market to invest, and in the money allocated by companies for greater transparency and corporate social responsibility. In the long run, companies with sustainable commitments and ethical behaviors have better performance than the market in its entirety. Customers can have a good insight into the companies that make up the basket due to their conducts and this can help create brand loyalty.

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gustavo neffa

Gustavo Neffa

I'm Gustavo Neffa. Director of Economics and Finance at FinGurú. Partner and director of Research for Traders, leading a team of market analysts. I spent the last 24 years in the financial sector in both domestic and foreign entities, having occupied the post of Senior Research Analyst in Macrosecurities of the Banco Macro and the BBVA Banco Francés, as well as economic analysts with the economist in chief of the BBVA Banco Francés. I am also a professor in Corporate Finance, Investment Portfolio Management, Financial Asset Valuation, Valuation of International Investment and Finance Projects in various MBAs and postgraduate courses in Buenos Aires and in the interior of the country and professor of the MBA of the UNLP and the UNNE of Financial Asset Assessment and the postgraduate degree in the UBA Capital Market in agreement with ByMA. Co-director of the UNLP Advanced Finance Programme.

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